Montpelier's budget: Whack-a-Mole

The 2009 legislature has gone home - at least for now. It will return on June 2 to attempt to produce an amended FY 2010 budget bill that Gov. Douglas will agree to sign.

If governor and legislature fail to reach an agreement by June 30, the state will face an unprecedented fiscal and legal crisis. That crisis would command the attention of the agencies that decree credit rating agencies, and the investment houses that market Vermont bonds. Not good.

In terms of actual spending for FY2010, the two sides do not appear to be far apart. In a general fund budget of $1086 million, the gap is only $38 million. The differences lie in the distribution of the spending, and in particular the political need of the Democrats to protect unionized state workers against layoffs. The fact that at least four of the key actors in this exercise aspire to be elected governor in 2010 makes resolving this disagreement a highly political exercise.

Every player in this drama knows full well that next year's budget, painful as it is, is not even the greatest problem. The greatest problem is the combined FY2011 and FY2012 budgets.

Taken together, without new tax increases, they are currently projected to produce $207 million in deficit spending and that assumes a dubious 3.5 percent revenue growth rate. The relatively easy spending cutbacks have been made.

Finding another $207 million to balance the budgets in the following two years is a truly staggering proposition - especially since federal stimulus funds run out in FY2011.

In the budget sent to the governor, the Senate Democrats cleverly provided for a reduction in the five personal income tax rates.

This will be paid for largely by ending the 40 percent exemption for capital gains realized in excess of $5,000 a year. Terminating the exemption and reducing the tax rates was first proposed by Gov. Douglas in 2004, but rejected by the legislature. The Democrat ploy now puts the governor in the position of objecting to his own proposal.

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